Audits of city finances often cover up serious problems

Accountants gave Bell clean reports, ignoring red flags that pointed to excessive salaries, illegal taxes and failure to follow reporting requirements. A Times review finds Bell is far from being alone.

The scandal in the city of Bell has resulted in seven separate investigations and one round of criminal charges against former City Administrator Robert Rizzo and other current and former officials. But year after year, during a period marked by record salaries, illegal taxes, loans to insiders and arbitrary fees on businesses, the city's outside auditors, Mayer Hoffman McCann, gave Bell's financial record a clean bill of health.

And Bell is far from being alone, according to a Times review of state and local records, which found that the independent audits that public agencies in California are legally required to obtain frequently fail to flag cases of fraud and mismanagement.

• Many cities that have been troubled by public corruption or mismanagement during the last decade — including San Diego, Compton and South Gate — got clean audits, even in cases in which public officials were later sent to prison.

• There has been a widespread failure by auditors to make sure that cities are properly spending hundreds of millions of dollars in redevelopment money. Each year, approximately 100 of the state's 391 municipal redevelopment agencies fail to file annual reports as required by law. Auditors are supposed to flag that failure as a major audit violation subject to review by the attorney general's office, but auditors catch the problem in fewer than 20% of cases, according to a recent report from the state Senate Office of Oversight and Outcomes.

• Firms that deliver negative audits risk being replaced. Cities pay the auditors, and some officials have responded to negative findings by hiring new auditors. In at least one case, the new auditors gave Victorville a clean rating after the previous auditor found a raft of problems.

"The audits of municipal governments in California … are more creative than reality" based, said former San Diego City Atty. Michael Aguirre. "They come in and help cover up what has been going on in a city so they can issue a clean financial statement, for which they are charging lots and lots of money."

Concerns about the quality of municipal auditing have been raised over the years by legislators and others. But the scandal in Bell has brought new attention to the issue. Even as Mayer Hoffman McCann issued audits that did not flag problems in Bell, the city won numerous awards for the financial reports signed off by the auditor.

State Controller John Chiang's office is investigating the quality of the Bell audits. But officials said they have already seen enough to conclude there were major problems. Hallye Jordan, spokeswoman for Chiang, said state auditors were baffled by "how a CPA firm could miss the abuses the controller's office found, and found rather quickly."

Mayer Hoffman McCann declined to comment on the Bell audits. The firm released a statement saying it was cooperating with the controller's office in its review of Bell's finances.

"Our hearts go out to the city of Bell's hardworking taxpayers," the statement said. "Our goal is to … work with the state controller and other regulatory authorities to pinpoint any issues that contributed to the situation in Bell, so that this can be prevented" in the future.

Among the most glaring problems in Bell, Chiang wrote in a September report, was the lack of internal controls, something auditors are usually supposed to check. "We found the city of Bell's administrative and internal accounting control system to be, in effect, nonexistent, as all financial activities and transactions revolved around one individual — the former chief administrative officer — who apparently had complete control," Chiang's report said, referring to Rizzo.

The Times, using documents obtained from the city, found excessive salaries for top officials, with Rizzo on track to earn more than $1.5 million in 2010. The Times also uncovered $1.9 million in illegal loans the city doled out to employees, a car dealer and a foundation without City Council approval, and special fees Bell demanded that some merchants pay to stay in business. None of these issues was noted by auditors.

After The Times' reports, the controller's office in a matter of weeks determined that the city had overcharged residents and businesses more than $6 million in taxes and fees. Chiang's investigators also found that officials had placed $23.5 million in bond funds in a non-interest-bearing checking account, costing the city about $1.7 million in potential interest.

Those problems and others could have been found by auditors, according to experts in the field.

"I audit 70 cities in the state. I know what these guys make," said Gary Caporicci, a certified public accountant who gives seminars on government accounting. "If I saw somebody makes $800,000, you have to say, 'Time out. What's going on here?' ... It's so out of line to what other clients have. ... Where are they getting all the money?"